The Impact of Inflation on the Commercial Insurance Market

Lately, inflation has been a major concern. The COVID-19 pandemic has brought about changes in labor and supply that are causing prices to rise, as seen in the country’s Consumer Price Index (CPI). According to Statistics Canada, consumer prices have gone up 5.7% in the past year, which is the biggest increase since 1991.

These inflation issues can cause some problems in the commercial insurance market, making things difficult for both insurers and policyholders. It’s important for people with insurance to understand inflation and take steps to make sure they have enough coverage during these tricky market conditions.

If you want to learn more about why inflation is happening now and how it affects the insurance market, check out the article. It will also give you some tips on how to protect yourself from these problems.

Key Causes of Inflation

Inflation has been a growing concern over the past year, as a result of several factors, namely, labour shortages and supply chain disruptions caused by the COVID-19 pandemic.

Labour shortages

Labour shortages have been widespread across sectors, caused by workers reevaluating their employment priorities and unemployment individuals apprehensive of returning to the workforce. These shortages have led to production delays and increased salary offerings, ultimately ramping up labour costs and contributing to inflation concerns.

Supply chain disruptions

Supply chain disruptions have also been a major issue, due to increased demand for items and materials amid a slowdown in production and lack of availability during pandemic-related closures. This has caused the cost of many items and materials to increase, contributing to inflation issues.

Economists anticipate supply chain conditions to improve in the latter half of 2022, which may ease inflation concerns. However, a combination of continued labour struggles and other lasting impacts from COVID-19 are expected to keep the inflation rate above pre-pandemic levels through at least 2023.

Impact on the Commercial Insurance Market

Rising inflation concerns can pose several difficulties in the commercial insurance market. Looking back, when prolonged inflation issues took place between the 1970s and 1980s, the insurance industry faced numerous consequences. Specifically, the commercial insurance market encountered reduced reserve levels, unpredictable claims trends and weaker underwriting performance—causing major losses for insurers and greater coverage challenges for policyholders.

It’s important to note that the insurance industry as a whole is currently better positioned to incur losses to its reserves when compared to previous periods of extended inflation due to outsized investment gains. Furthermore, advances in financial reporting processes have given insurers additional capabilities to identify and respond to loss trends. However, uncertainty surrounding how long existing inflation issues will last could eventually threaten the long-term stability of the insurance industry’s reserve levels and underwriting profitability.

Taking a closer look at specific lines of coverage, the following markets are at risk of being impacted by rising inflation:

• Commercial property—Within the property insurance space, the cost to repair or rebuild structures following a loss has soared, as worker shortages within the construction industry have led to increased labour costs. At the same time, supply chain issues related to various essential building materials caused the price of these items to skyrocket. In particular, prices for lumber in North America have almost tripled since August and are nearing record levels set last spring. Such inflation is further evidenced a substantial CPI increase over the past year for a number of structural elements—including floor coverings, window coverings, major appliances and overall construction materials. Amid elevated property loss costs, insurers may experience poor underwriting results, motivating them to increase policyholders’ premium expenses and introduce additional coverage restrictions. With heightened repair and rebuilding costs increasing overall claim severity, policyholders may also encounter potential underinsurance concerns following larger property losses.
• Commercial auto—In the auto insurance market, vehicle repair expenses and subsequent claim costs have surged. This trend is predominately caused by worker shortages in the auto industry generating elevated labour costs and supply chain disruptions for several critical vehicle parts (and vehicles overall), leading to higher prices for such items. Similar to the property insurance market, elevated loss costs could lead to a decrease in underwriting profits for auto insurers. Especially in a market that has been largely unprofitable for the last decade, higher loss costs may cause auto insurers to heighten premium expenses and restrict coverage offerings for policyholders.

Although it’s currently making the most significant impact on the property and auto insurance markets, such prolonged inflation will likely begin to affect additional segments over time. This means that insurers could face difficulties in maintaining insurance pricing to keep up with more volatile loss trends.

To prevent unanticipated loss costs and increased loss ratios due to rising inflation concerns, insurers may need to continue increasing overall premium expenses and making other coverage adjustments.

Mitigating Inflation Risks: How Policyholders Can Protect Themselves

Because ongoing inflation issues have the potential to result in heightened premium costs, coverage restrictions and underinsurance concerns, it’s important for policyholders to do what they can to minimize such complications. Some steps that insureds can take include the following:

Have policy renewal conversations early. Especially amid these challenging market conditions, policyholders should work with their trusted insurance professionals to discuss the coverage renewal process well in advance. Doing so will allow insureds to stay properly informed on the latest inflation trends and give them ample time to prepare for potential policy changes—particularly as it pertains to pricing—prior to renewal. Going forward, policyholders may want to have quarterly meetings with their insurance professionals to ensure they are able to adjust their coverage as needed in this evolving inflation landscape.

• Review coverage terms and conditions. When meeting with their trusted insurance professionals, policyholders should also make sure to obtain assistance in reviewing their coverage terms and conditions, paying attention to any exclusions. Further, it’s crucial that insureds assess their policy limits (and sub-limits, if applicable) to determine whether they will be adequately covered following a loss. If policyholders or insurance professionals identify underinsurance issues, they may want to update their coverage and consider purchasing policy endorsements to maintain proper protection.
• Reassess property valuations. Regarding commercial property insurance, policyholders should be sure that their coverage reflects correct property valuations. With property repair and rebuilding costs on the rise, insureds must confirm the valuations utilized in their policies would be able to cover current recovery expenses after a loss. Otherwise, outdated valuations could leave policyholders underinsured if the cost of repairing or rebuilding their properties exceed their existing coverage limits.
• Ensure adequate risk management practices. Lastly, policyholders should make sure they have effective risk management measures in place to prevent potential claims. By documenting these measures and sharing them with their insurers, policyholders may even qualify for premium discounts.

In conclusion, inflation has been a major concern over the past year due to the COVID-19 pandemic causing labour shortages and supply chain disruptions. This has led to rising consumer prices and potential difficulties in the commercial insurance market. It’s important for policyholders to understand inflation and take steps to make sure they have enough coverage during these tricky market conditions.

To learn more about how to protect yourself from these inflation-related risks, reach out to CMB Insurance Brokers for more information. We can provide you with valuable insights and guidance to help you navigate this challenging market: call CMB at 780.424.2727 or click here to get a quote.